tag:blogger.com,1999:blog-8702840202604739302.post7312589087416237478..comments2022-09-29T22:40:14.740-07:00Comments on MacroMania: Is Neo-Fisherism Nuts? David Andolfattohttp://www.blogger.com/profile/12138572028306561024noreply@blogger.comBlogger16125tag:blogger.com,1999:blog-8702840202604739302.post-41438270878043764382019-02-21T12:29:22.017-08:002019-02-21T12:29:22.017-08:00Two separate issues here:
[1] How does persistent...Two separate issues here: <br />[1] How does persistent increase in policy rate lead to increase in inflation expectations (and inflation)? <br />[2] Is it possible to create inflation holding the policy rate fixed?<br /><br />With respect to [1], conventional Fisher says interest rate on illiquid securities will rise in response to increase in expected inflation rate. This is easily explained. According to Neo-Fisher, inflation expectations must rise in response to increase in interest rate (which you mistakenly take as the policy rate). Your intuition seems to be that since the Fisher equation must hold, inflation expectations *have* to rise, and that's all there is to it. I think people would appreciate you explaining better the economic mechanism that's supposed to make inflation expectations rise. Once the mechanism is better understood, we can then judge its empirical plausibility better.<br /><br />[2] I'm not sure what you're missing here. Consider any monetary model with fiat money as only asset. Then print money to create inflation. This would be true for *any* fixed nominal interest rate on money. Next, introduce an illiquid asset. The nominal return on that illiquid asset will satisfy the Fisher equation. But the yield on money will generally be lower because money earns a liquidity premium. So, if you want Japan to create inflation, keep policy rate fixed and just print more money. There is no need to raise the policy rate, contrary to your Neo-Fisher claims. David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-49744435460544922382019-02-20T07:56:07.605-08:002019-02-20T07:56:07.605-08:00All I can say is that you're very confused, or...All I can say is that you're very confused, or you're pretending to be confused. What a waste of time.Steve Williamsonhttps://www.blogger.com/profile/16629774961390533020noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-8075224933257043542019-02-19T18:38:18.421-08:002019-02-19T18:38:18.421-08:00Yes, as I mentioned in my post, there are two Fish...Yes, as I mentioned in my post, there are two Fisher equations. One for "money" and one for illiquid bonds. <br /><br />F1: R = r + P<br /><br />F2 R_m + LP = r + P (where LP is liquidity premium)<br /><br />I claimed that government bonds are not illiquid assets, except by policy choice. E.g., Fed could buy up all illiquid bonds and converted to money (interest bearing reserves).<br /><br />R_m is the interest on reserves (liquid govt debt). <br /><br />The Fed can target R_m and continue to buy additional government debt as it is issued. This is what I recommend to generate inflation. Monetizing a more rapidly expanding nominal debt. <br /><br />This would cause R to rise, but this R applies to illiquid securities. So Fisher in this sense holds. But my claim holds too: Fed can target the policy rate and create inflation.<br /> <br />This is the sense in which your claim "So, targeting higher R necessarily produces higher inflation." is not correct. Fed does not target the interest rate on illiquid securities. It targets the interest rate on liquid government debt (e.g., reserves). <br /><br />Yes? David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-52639931428960378282019-02-19T16:56:28.039-08:002019-02-19T16:56:28.039-08:00I see. There are illiquid assets. Then there is an...I see. There are illiquid assets. Then there is another category of assets - say reserves and government debt - that are more liquid than the illiquid assets. Then there's currency. Typically of course, the interest rate that the CB is targeting is the nominal interest rate on the second class of assets. And, supposing no reserve requirements (Canada, say) either we have a corridor system with zero reserves overnight, in which the interest rate on reserves is less than the interest rate on goverment debt (if there were overnight government debt), or a floor system where those two interest rates are the same. What you called a "Fisher equation" is of course very special. Typically, what we write down in models to determine the real rate is some equation to price a security with a certain real payoff. Then, (exchange value or collateral), the "Fisher equation" won't hold in general, due to inflation risk associated with nominal bonds, or different liquidity premia on real and nominal bonds. When you say the Fisher equation doesn't hold up in the data, I think what you mean is that the long run real rate is not constant. Sure. There are variable liquidity premia, the real rate depends on the growth rate of consumption, there are Tobin effects, etc. Even if we take account of all that, this doesn't necessarily mean that, if monetary policy causes the nominal rate on govt. bonds to be 1% higher permanently, that inflation will go down in the long run. That's not what we observe in the time series, or across countries.Steve Williamsonhttps://www.blogger.com/profile/16629774961390533020noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-61404799963417788382019-02-19T13:31:38.389-08:002019-02-19T13:31:38.389-08:00But they do in the models you work with. Reserves ...But they do in the models you work with. Reserves (and any treasuries that are perfect substitutes) have a liquidity premium. So yes, people will hold reserves even if the nominal interest rate on illiquid securities is higher. David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-57197369532049240242019-02-19T12:48:02.891-08:002019-02-19T12:48:02.891-08:00No. Obviously no one holds the reserves if the nom...No. Obviously no one holds the reserves if the nominal interest rate is positive.Steve Williamsonhttps://www.blogger.com/profile/16629774961390533020noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-59165020654235193542019-02-19T09:37:54.923-08:002019-02-19T09:37:54.923-08:00Replace currency with zero-interest reserves, wher...Replace currency with zero-interest reserves, where everyone has access to zero-interest reserves. That's another interpretation of currency in our models. Doesn't the existence of this zero-interest asset violate the Fisher equation? David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-49840365503362015272019-02-19T08:06:15.121-08:002019-02-19T08:06:15.121-08:00I think you're both wrong.I think you're both wrong.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-67033346288753218552019-02-19T08:05:18.579-08:002019-02-19T08:05:18.579-08:00"It seems that I failed to make myself clear ..."It seems that I failed to make myself clear once again."<br /><br />The problem is not making yourself clear. It's that your self is not clear. :)<br /> <br />"Why does the interest rate on currency remain at zero as inflation rises?"<br /><br />I'm surprised you're asking that question. As you know, due to technological limitations, currency is a zero-nominal-interest object.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-70166387796537303262019-02-18T19:11:15.778-08:002019-02-18T19:11:15.778-08:00LOL, I'd say everyone is always wrongLOL, I'd say everyone is always wrongez_angushttps://www.blogger.com/profile/15718038722134616975noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-36416361604221321212019-02-18T16:46:52.956-08:002019-02-18T16:46:52.956-08:00The nice thing about macroeconomics is no one is e...The nice thing about macroeconomics is no one is ever wrong.Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-9546364845780565752019-02-18T15:41:40.737-08:002019-02-18T15:41:40.737-08:00(1) and (2) implicitly assumes Euler Equation is c...(1) and (2) implicitly assumes Euler Equation is correct. But empirical supports for Euler Equation are weak. Thus conventional view is not as solid as macroeconomists used to assume. The question whether Neo-Fisher is correct or not remians open.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-48674266850074001532019-02-18T15:16:06.385-08:002019-02-18T15:16:06.385-08:00Well, I did the best I could in explaining my rese...Well, I did the best I could in explaining my reservations. It seems that I failed to make myself clear once again. <br /> <br />What about the observation I made about currency? Why does the interest rate on currency remain at zero as inflation rises? Doesn't this violate your Fisher equation? David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-33433616941519206042019-02-18T12:42:35.711-08:002019-02-18T12:42:35.711-08:00Basically, their result says that if inflation and...Basically, their result says that if inflation and inflation expectations are highly sticky, that you get instability at the ZLB - either you get hyperinflation or hyperdeflation in the long run. So how come Japan is stable?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-76961857788885759552019-02-18T12:39:35.662-08:002019-02-18T12:39:35.662-08:00What's nuts is that you're making this way...What's nuts is that you're making this way too hard. If you really like (1)-(4) as your causal link, you can see it right away. Central banker controls (1), and understands the causal link too. What the central banker is trying to do is to use (1) to achieve a target for (4). And in the long run presumably people aren't anticipating inflation that isn't realized. So, targeting higher R necessarily produces higher inflation. Simple. Just repeat it to yourself every night before you go to sleep.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-18228359369650789652019-02-18T12:33:40.118-08:002019-02-18T12:33:40.118-08:00George Evans and Bruce McGough have a great paper ...George Evans and Bruce McGough have a great paper that examines the stability of such expectations in this paper https://pages.uoregon.edu/gevans/InterestRatePegs_26april2016.pdf …Joshua Clarkhttps://www.blogger.com/profile/11188762472816929982noreply@blogger.com